On August 15, 2025, the United States Court of Appeals for the Fourth Circuit issued a significant ruling that will have far-reaching implications for companies subject to Maryland’s Digital Advertising Tax (DAT). The court held that a Maryland statutory provision prohibiting sellers from itemizing the DAT on invoices violates the First Amendment. This ruling not only impacts digital advertisers but also highlights broader issues around tax compliance, transparency, and businesses’ rights to communicate with their customers.
Background: Maryland’s Digital Advertising Tax
Maryland made national headlines in 2021 when it became the first state to impose a tax on digital advertising services. The DAT applies to gross revenues derived from digital advertising in Maryland, targeting large companies that provide banner ads, search engine ads, interstitial advertising, and other forms of digital marketing.
Despite strong opposition, the Maryland legislature enacted the tax by overriding the governor’s veto. From the beginning, the law raised serious constitutional questions, both under the Commerce Clause and the First Amendment. Critics argued that the DAT unfairly targets a specific form of commerce and imposes complex compliance burdens.
To add to the controversy, the legislature passed a provision that prohibited sellers from passing the tax on to customers through a separate line item, surcharge, or fee. In other words, a digital advertising provider could not explicitly show the DAT on an invoice, even if that provider wanted to be transparent about the costs. Instead, businesses were left with the option of simply increasing their prices and absorbing or indirectly passing on the tax.
Summary Timeline
|
Period |
Key Development |
|---|---|
|
2021 |
Law enacted targeting digital ads with tiered global revenue tax rates |
|
Oct 2022 |
Trial court ruled tax unconstitutional (ITFA, Commerce Clause, First Amendment) |
|
May 2023 |
Maryland Supreme Court reinstated the tax on procedural grounds. |
|
Jan 2024 |
Federal First Amendment challenge revived by appeals panel |
|
Feb 2025 |
Apple and others granted hearings in Tax Court |
|
Aug 2025 |
Appeals court struck down itemization ban, citing First Amendment violation |
The Challenge: Free Speech and Transparency
The U.S. Chamber of Commerce and several trade associations challenged the pass-through prohibition in federal court. Their argument was straightforward: prohibiting taxpayers from showing the DAT as a separate line item is a restriction on speech. Businesses, they claimed, have the right to explain to customers what portion of their bill represents state-imposed taxes.
The Fourth Circuit agreed. The court found that the law impermissibly restricted protected speech by forbidding companies from expressing the cost of the tax in three specific ways —separate fee, surcharge, or line item —while still allowing other explanations of price increases. This made the law “content-based,” triggering a heightened level of constitutional scrutiny.
The judges concluded that Maryland’s prohibition could not survive even intermediate scrutiny, much less strict scrutiny. They held that the pass-through ban was unconstitutional “in all of its applications” and struck it down.
What Happens Next?
Although the ruling invalidates the pass-through ban, the broader battle over the DAT itself is far from over. Other taxpayers are continuing to litigate the DAT’s overall constitutionality in the Maryland Tax Court, with challenges focused on federal preemption and the discriminatory nature of the tax.
For now, businesses that provide digital advertising services in Maryland face a complicated environment:
- The DAT remains in effect and must be collected and remitted.
- The pass-through prohibition is unconstitutional, meaning businesses can now show the DAT on invoices if they choose.
- Future rulings may still strike down the DAT entirely, adding uncertainty to long-term compliance strategies.
Practical Considerations for Businesses
This case highlights the tension between state tax innovation and constitutional protections. For businesses, the immediate considerations include:
- Invoice Practices – Companies may now choose to itemize the DAT on customer invoices. However, they should carefully weigh whether doing so is beneficial from a client relationship standpoint.
- Compliance Burden – Even if the DAT is ultimately struck down, businesses must continue to comply for now. This involves monitoring gross revenues, accurately calculating liabilities, and filing returns in a timely manner.
- Communication Strategies – Transparency with customers is key. Businesses must determine how to communicate price changes or added costs, whether through separate line items, explanatory notes, or bundled pricing.
- Potential for Taxpayer Refunds – If the DAT itself is invalidated, refunds may become available. Companies should keep thorough records to support any potential refund claims.
How Thompson Tax Can Help
At Thompson Tax, we recognize that navigating new and evolving state tax regimes is one of the most significant challenges businesses face today. The Maryland DAT is just one example of how quickly the tax landscape can change, and how important it is to have trusted advisors by your side.
Here’s how we can assist:
- Compliance Management: We help businesses track, calculate, and file complex sales and use taxes, including emerging taxes like the DAT. Our team ensures you stay compliant while minimizing risk.
- Policy and Planning: We guide companies on whether and how to itemize taxes on invoices, balancing compliance with customer communication strategies.
- Audit Support: State tax authorities are likely to scrutinize digital advertising revenues closely. We provide audit defense, document preparation, and representation to safeguard your interests.
- Refund Opportunities: If future rulings invalidate the DAT altogether, we can help businesses file refund claims and recover overpaid amounts.
- Multi-State Expertise: Maryland is unlikely to be the last state experimenting with digital tax policy. We assist companies operating nationwide in staying ahead of legislative changes that could impact their bottom line.
The Bottom Line
The Fourth Circuit’s ruling marks a significant victory for taxpayer speech and transparency. Businesses can now communicate openly with customers about the Maryland DAT. But the broader fight over the DAT’s constitutionality, and the trend of states experimenting with novel tax structures, remains ongoing.
Whether your business is navigating Maryland’s Digital Advertising Tax or simply looking for greater confidence in your overall sales and use tax strategy, Thompson Tax is here to help. Our team turns tax complexity into clarity so you can focus on growth with peace of mind. Contact us today!